University Studies or Vocational Training – What Returns to Education Can Be Expected? Education pays

Each additional year of school, vocational training, or university education pays off, leading on average to hourly earnings six per cent higher in one's later professional life. PD Dr. Friedhelm Pfeiffer, an educational economist at ZEW, talks about various aspects of this finding.

PD Dr. Friedhelm Pfeiffer coordinates the research area "education economics" and is deputy head of the Research Department "Labour Markets, Human Resources and Social Policy". PD Dr. Pfeiffer is a member of the Educational Research Committee of the German Economic Association (Verein für Socialpolitik) and has been a member of the Mannheim Advisory Council on Education since 2010. His research interests include the analysis of the causes and consequences of educational investment over the life cycle, as well as the evaluation of active labour market and educational interventions.

Is a college degree increasingly worth more than a vocational degree? What is behind this trend?

The cause is higher “returns to education”, which refers to the additional earnings per hour attained from one additional year of vocational training or university education. It takes longer to acquire a university diploma than a vocational degree. As a result, individuals with a university diploma tend to earn more than those with a vocational degree. As returns to education have increased in past years, the skill premium, that is the earnings gap between university graduates and vocational training graduates, has grown. In our research project "BRendit: returns to education and income risks of studying", that is funded under the funding line "economics of science" of the German Federal Ministry of Education and Research, the current development is explored empirically. This increase in returns to education is attributable in part to the fact that machines are becoming even "smarter", and are conquering more and more productive sectors. To develop and operate these increasingly complex, “smart” machines, skills are required than can be attained primarily at universities, and only to a limited extent at vocational schools.

Are university and technical college degrees in the same area associated with different pay levels?

On average, yes. There are significant differences in the length and intensity of the educational period required for these two types of academic degrees. Generally, university studies take one to two years longer than a technical college education. As a result, the growth in earnings after a university degree is on average higher than the growth in earnings after a technical college degree. In this respect thedegree of skill acquisition plays an important role for differences in pay between different levels of education.

Does a tertiary education thus offer a greater payoff than vocational training?

As a rule, yes. There are exceptions, however. Crucial factors are quality of education, the individual's affinity for a given career, and relative scarcity in the labour market. Individuals who are lucky enough to have obtained a good vocational education, earning a degree in a field in which employers are desperately seeking qualified workers, may earn more than a university graduate who is looking for work in a field in which few positions are available andthere are manycompetitorsin the market. Many individuals, for example, choose fields in which social interaction plays a major role, such as interpreters, nurses, social workers, or athletes. This can have a significant effect on returns to education. The more popular a profession is and the easier it is to learn, the lower the average earnings in that field. However, if a profession is difficult to learn and not very popular, then returns to education will tend to be higher.

Do returns to education differ between men and women?

Today, the payoff of getting an education is approximately the same for men and women. The pay gap between men and women with the same degree is attributable first and foremost to the fact that women more frequently take parental leave, and, in addition, frequently work fewer hours annually. Both of these factors explain a significant portion of the pay difference between men and women with the same degree.